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Gift Tax

12/06/2018

“Assets in 529 plans have grown significantly in recent years, due to their college planning potential. However, there’s another side to 529 plans that may appeal to you—potential estate planning benefits.”

To understand the way in which a 529 college savings plan can work with an estate plan, it’s important to start with some basics on how a 529 plan works.

The Cary Citizen asks in a recent article, “529s and Estate Planning: What’s the Connection?” A 529 plan is a college investment program sponsored by a state government and administered by one or more investment companies. The investment options in the plan are usually mutual fund portfolios. They’re “age-based” asset allocations that are more conservative, as the beneficiary gets closer to attending college or static portfolios, with predetermined allocations that stay consistent over time.

Withdrawals from a 529 are tax-free, provided they’re used for qualified college expenses. Nonqualified withdrawals are subject to ordinary income taxes and a 10% additional federal tax penalty. The good news is that the eligibility to contribute to a 529 plan isn’t restricted by age or income.

As far as your taxes, a contribution to a 529 plan is considered a completed gift from the contributor to the beneficiary named on the account. A contributor can, therefore, potentially reduce the size of her taxable estate using a 529 plan. Contributions can be up to $15,000 per beneficiary annually and $30,000 per beneficiary, if you contribute jointly with a spouse without any federal gift tax.

Along the same lines, if you’d like to decrease the size of your taxable estate more quickly, you can make five years’ worth of gifts in a single year, provided you don’t make any additional gifts to the beneficiaries for the remainder of that period. Therefore, you can accelerate your contributions and gift $75,000 per beneficiary as an individual or $150,000 per beneficiary, if done jointly with a spouse. However, if you use this strategy, a prorated portion of the contribution may be considered part of your estate, if you don’t live beyond the five-year period.

Whether you contribute annually or on an accelerated basis, a 529 plan can give you a lot of flexibility as part of your estate plan. For example, although the money in the account is considered a gift to the beneficiary, you still have control over how it’s invested. If the beneficiary doesn’t attend college, you can name a new beneficiary who’s a relative of the original beneficiary.

If you’re dealing with estate planning and college financing decisions that affect a growing family, you may benefit by seeing how a 529 plan could play a role in both of these areas.

People who knew Paul Allen say he had a long-term plan. They say his money has been working in secret for decades now, arguably outside his immediate control. Wealth Advisor’s recent article, “Paul Allen Had A $20 Billion Estate Plan (The IRS Can't Touch)” notes that fact will made it difficult for the IRS to get a share of the estate.

Allen left Microsoft back in the 1980s due to a mild form of lymph node cancer. It was the disease that ultimately killed him.

Allen was rich, so he spent his life engaging in a wide range of interests, like venture capitalism, research, real estate development, yachting, sports and music. His fortune flowed through a holding company. Subsidiaries of Vulcan Inc. ran his investments, as well as his charities, sports teams and high-tech toy collections. Vulcan isn’t a conventional family office, so there’s no division between the principal and his interests on the “family” side and the day-to-day operations on the “office” side. That makes it much harder to separate Allen’s personal estate from his corporate interests. He was sole owner of the company, but the company owned everything else.

The cancer came back 10 years ago. He licked it then, but probably took that as a wake up call to be sure the operations would continue without him. Execs at his company have mentioned his plan for continuity. Therefore, Vulcan will look exactly the same without him, as it did when he was running it.

Vulcan invested billions into reshaping Seattle, purchasing real estate and sometimes selling it for big profits. He owned the local sports teams and a few of the museums. Vulcan also ran the most prominent local movie theater. On the business level, Vulcan was the vehicle through which he bought into the start-up companies that he liked.

Allen was never married, and his sister and her children were his only close family. His sister was a key employee at Vulcan, but Paul kept control and full ownership. She moved to the family foundation side. Her three 20-something children are probably well off, and the older ones have already worked for family businesses. The youngest is still in school. These children will most likely find spots at Vulcan, but whether they ever own the company in their own right is unknown.

While the foundation is too small to own the firm, it could inherit Vulcan. In that situation, the heir isn’t going to pay much of an estate tax on the gift. Allen signed the giving pledge, and handing formal ownership of the firm to the foundation satisfies that objective. Vulcan would continue unchanged, following its founder’s instructions to invest in his interests and fund his causes.

If parents transfer their home to a child, the child can keep the current assessed value and annual property tax. The transfer can be either while the parents are living or in their will. If the transfer is an inheritance, and the child keeps the low property tax base, the child will still receive the stepped-up basis and avoid a substantial capital gain, when the home is eventually sold.

In other words, if parents give their home to their child as an inheritance, can the child have both the continued low property tax and the stepped-up basis? Yes, provided the property is transferred at the parent’s death. If it’s transferred while the parent is still alive, the child will receive the property tax break. However, he or she will not get the step-up in basis, which is a huge tax break for highly appreciated homes.

People frequently confuse “property tax base” and “cost basis,” and property taxes with income taxes. They’re entirely separate systems. Property taxes are governed by state law. Cost basis, capital gains and the step-up in basis are part of the income tax system.

Under the income tax system, the cost basis in your home (if you’ve never rented it out) is generally what you paid for it, plus the cost of major improvements. If you sell your home for more than its cost basis, the profit is taxed as a capital gain. If you’ve used the home as your primary residence for at least two of the past five years ending on the sale date, the first $250,000 in capital gains, or $500,000 for married couples, is tax free. If you retain your home until death, your heirs could receive an even greater capital gains tax break.

When you pass away with appreciated assets, including a home, their cost basis is “stepped up” to the market value on your date of death. Your heirs inherit the assets with their new, stepped-up cost basis. This will eliminate any taxes on the appreciation that happened in your lifetime. If your heirs sold these assets immediately, they’d owe little or no capital gains tax.

Unlike the property tax break, this capital gains tax break is only for inherited property. If you give your home to a child while you’re still alive, the child takes over your cost basis and loses the stepped-up basis. In addition, if you give your child all or part of the home while you’re alive, you’ll have to file a gift-tax return for the value that exceeds the annual gift tax exclusion. Although you probably won’t owe gift tax on the home’s value, it will be subtracted from your combined lifetime gift and estate tax exemption, which is $11.18 million for any person who dies in 2018, or $22.36 million for a couple.

08/07/2018

The “sandwich generation” is a generation of people, who are usually in their 30s, 40s and 50s. They are caring for their aging parents, while supporting their own children. If this sounds like you, then this means you’ve got a lot to worry about. Even if you are not taking financial responsibility for your parents, you are dedicating time and energy, usually willingly. However, that means there’s less of both for you, your family and your career.

Talk About Money Issues. Discuss finances with your children and parents. Perhaps you could go with them to meet with their estate planning attorney. He or she can make sure your parents have all the proper estate planning documents, such as a will, trust, living wills and powers of attorney.

This legal professional will create a plan to lessen or avoid estate taxes and work to ensure that your life's savings and assets are protected from your beneficiaries' creditors after your death, and that your legacy is assured.

Estate planning attorneys are accustomed to working with families and navigating the issues between adult children and their aging parents. There is little chance that yours is a unique situation. It does not mean it is easy, but a skilled attorney will be able to help you and your family deal with whatever situation you face, with dignity and compassion.

Get (More) Help. You may get support or assistance to help your parents, your kids, or even yourself. Odds are good that your parents will be reluctant to accept help, so start the process yourself. This could involve hiring a housekeeper for yourself to free up some of your time for things that are more important.

This will give you more time, and your parents won’t feel you are using your finances to assist them. If you have friends and relatives that offer help, take them up on it. Don’t try to do everything yourself.

If your children are old enough, you can also get them involved. Children are surprisingly capable, and sometimes grandparents are more comfortable having grandchildren help with minor chores around the house, where their children’s own actions may seem intrusive.

3.Don’t Feel Guilty. It’s impossible to get to everything. Be sure to take it one day at a time and to take care of yourself.

11/20/2017

Questions often come up when gifting to children. What are the consequences to the giver and to the recipient? An article from nj.com, “Gift tax consequences for you and your heirs,” begins with the big picture, then looks at the annual gifting amounts and what it means for your taxes and for those of your children.

The IRS considers a gift to be any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) isn’t received in return. However, there are exceptions to this rule. Generally, the following gifts are not taxable:

Gifts that aren’t more than the annual exclusion for the calendar year;

Tuition or medical expenses you pay for someone (the educational and medical exclusions);

Gifts to your spouse;

Gifts to a political organization for its use; and

Gifts to qualifying charities are deductible from the value of the gift(s) made.

The federal estate and gift tax exemption is $5.49 million per person this year, which means that a person can leave and/or gift a total of $5.49 million to their heirs without paying federal estate or gift tax. The cutoff will typically increase with inflation each year. Accordingly, the amount will be $5.6 million beginning on January 1, 2018.

There is a federal annual gift tax exclusion amount that doesn't count toward the lifetime gift exemption. That annual gift tax exclusion amount is $14,000, and has been so since 2013. As a result, a person can give away $14,000 to as many people as he or she would like without a tax issue. Note: That amount is increasing to $15,000, beginning on January 1, 2018. There’s no gift tax return to be filed, if the annual gifts total $14,000 or less to each individual done.

For gifts over $14,000 to a single individual in a given tax year, the giver must file a gift tax return. However, this does NOT mean that a gift tax is due unless a gift is in excess of the federal exclusion amount (i.e. $5,4900,000) is being given away. Rather, the overage is simly deducted from the federal exclusion amount. Therefore, if one were to give $114,000 to an individual in 2017, a gift tax return would be filed and one would only have $5,390,000 left to give away either during life or after death. For most of us, this is not an issue.

If you have questions or are unsure of the current law and how it would impact you, speak to an experienced estate planning attorney.